Abstract:&nbspIn this paper, we embed the microeconomic decisions associated with
investment under uncertainty, capacity utilization, and machine
replacement in a general equilibrium model based on putty-clay
technology. We show that the combination of log-normally distributed
idiosyncratic productivity uncertainty and Leontief utilization choice
yields an aggregate production function that is easily characterized
in terms of hazard rates for the standard normal distribution. At low
levels of idiosyncratic uncertainty, the short-run elasticity of
supply is substantially lower than the elasticity of supply obtained
from a fully-flexible Cobb-Douglas alternative. In the presence of
irreversible factor proportions, an increase in idiosyncratic
uncertainty typically reduces investment at the micro level but
increases aggregate investment. Finally, we study the relationship
between growth and uncertainty on aggregate capacity utilization and
rates of machine replacement and investigate the factors that affect
the magnitude of replacement echoes.